Does US-Listed mean US dollar denominated?

[FLBiker]

My wife and I are new Canadian permanent residents and US citizens.  We recently sold our house and are looking to invest some of the proceeds.  We still have a Vanguard account (using my brother's address) and are planning to open a Questrade account (for Vanguard ETFs).  I understand that I want to avoid Canadian-listed ETFs (as they are considered PFICs), so I'm planning to by US-listed ETFs.

Is this the same thing as buying US dollar denominated ETFs?  Can I buy a US-listed ETF in Canadian dollars?  If so, I think I'd like to do that, as I'd like to diversify the currency of our investments (which is currently all USD).

Secondarily, if we're going to end up investing in USD anyways, is there any reason (in terms of tax reporting or whatever) to use Questrade rather than our existing Vanguard account?  Is there any problem with us just adding money to the existing Vanguard account?

Thanks for your help and please don't hesitate to ask if any additional information would be relevant.

[daverobev]

Currency of purchase is not relevant; if you buy 10 bananas for $1 US or $1.3 CAD, you still own 10 bananas. An ETF tracking an index should perform the same after fees whether it is Canadian or US (this isn't 100% true, but you're generally going to be better off with the US stuff). Because of the market sizes, I don't think you'll find US-domiciled stuff listed in Canadian money, so it's moot.

You want, I believe, to own US domiciled ETFs; this will mean they are in USD. So, VT, VXUS, etc.

The reason to use Questrade is that you will get Canadian tax slips. I think they will also send you US info. Where a US account will not give you the Canadian info (T slip), you'll have to work it all out yourself... though there is an argument that says you should do this anyway as the values given can be wrong (with respect to return of capital generally, I think).

If you have more than $100k CAD in foreign property you must file T1135. It is a massive pain, but there are penalties to not doing so. Just be aware.

[FLBiker]

Thanks for this -- what you're saying re: currency of purchase makes sense to me.  Does this mean that fluctuations in exchange rate are effectively baked in to the price of the ETF?

And thanks for the info re: form T1135.  I'm planning to hire someone to do my taxes the first year, but I'll definitely keep this in mind.

[Sisko]

There are a lot of things to consider in all this.

I believe the answer to your original question (does US-listed mean US denominated?) - I think the answer is yes.

Currency exchange fees matter - even if you don't see it Questrade is charging you by giving you a worse exchange rate than the current market rate. This is known as the "spread". I'm not sure what Questrade's spread is nowadays - most banks charge about 2% worse than the market rate. If you're exchanging a lot of money, look into Norbert's gambit. That's what I always do on Questrade.

I don't personally hold US listed funds in my unregistered accounts because of T1135 and because the hassle of keeping track of exchange rates for capital gains. Pain in the butt. In registered accounts (RRSP in TFSA) both these issue go away, so I hold US listed ETFs in those. I think this is a pretty common strategy.

There are often Canadian listed equivalents - for example VTI has a Canadian equivalent called VUN. Even though it's listed on the Canadian exchange in Canadian dollars, it is unhedged, so it perform identically to VTI (except for fees being a tiny bit worse).

So hedged vs unhedged is the other thing you could look into, that might answer the core of you questions. If you want less exposure to the US dollar you could buy hedged ETFs. That would be something like VUS - you're essentially betting that the Canadian dollar is going to do better than the US dollar.

There are basically 3 options when buying a US ETF:
1. Buy on the US exchange in US dollars
2. Buy on the Canadian exchange in Canadian dollars (unhedged)
3. Buy on the Canadian exchange in Canadian dollars (hedged)

Options 1 and 2 will perform almost identically. Option 3 will do better or worse proportionally to how well the Canadian dollar does.

Sorry, hard to explain all this, and I'm not an expert at all. But it might give you a jumping off point for further research.

[daverobev]

Thanks for this -- what you're saying re: currency of purchase makes sense to me.  Does this mean that fluctuations in exchange rate are effectively baked in to the price of the ETF?

And thanks for the info re: form T1135.  I'm planning to hire someone to do my taxes the first year, but I'll definitely keep this in mind.

Yeah if you buy something, in a fully efficient system, the value of the thing should reflect exactly the exchange rate.

So if you bought $1000 USD of something that trades in both CAD and USD, and CAD:USD is 1.3:1, the value in CAD is $1300. If the value of the thing in USD doesn't change but CAD:USD changes to 1.2:1, then the value in CAD is $1200. There isn't anything magic here - there are arbigatreurs who ensure in a liquid market that this is kept true.

So even if you buy two 'different' ETFs, but both track the S&P500, one in CAD and one in USD with totally different providers and prices, the performance over time (excluding any MER difference) should be very very similar.

Currency is basically not relevant, so you should absolutely buy US domiciled stuff. You can change currencies very cheaply - with Questrade you can use Norbert's Gambit to 'journal' something from the CAD to USD versions (there is a popular ETF for this, DLR.TO and DLR.U.TO, IIRC).

[FLBiker]

Currency exchange fees matter - even if you don't see it Questrade is charging you by giving you a worse exchange rate than the current market rate. This is known as the "spread". I'm not sure what Questrade's spread is nowadays - most banks charge about 2% worse than the market rate. If you're exchanging a lot of money, look into Norbert's gambit. That's what I always do on Questrade.

I don't think this is an issue for me -- I'm paid in USD, so I'll be sending USD direct from my US bank account to Questrade.  If I'm missing something, though, please let me know!

There are basically 3 options when buying a US ETF:
1. Buy on the US exchange in US dollars
2. Buy on the Canadian exchange in Canadian dollars (unhedged)
3. Buy on the Canadian exchange in Canadian dollars (hedged)

That makes sense, but my understanding is that the only option that wouldn't trigger PFIC paperwork is #1.  Is that wrong?

You can change currencies very cheaply - with Questrade you can use Norbert's Gambit to 'journal' something from the CAD to USD versions (there is a popular ETF for this, DLR.TO and DLR.U.TO, IIRC).

I've looked into this a bit, and I think this may be problematic for US citizens.  As I understand it, holding the Canadian version (even briefly) triggers PFIC reporting requirements.

[Sisko]

Sorry, you can probably ignore everything I've said. I missed the fact that you are a US Citizen. Make sure to get an accountant who specializes in cross border issues.

[daverobev]

Have you confirmed with Questrade that they will take USD directly from a US institution? IIRC I had to transfer from my US bank to a Canadian bank's USD account, and then in to Questrade.

Yes you're right you probably don't want to hold DLR, sorry. If you're ok holding Canadian stocks though you could do the same with for example Royal Bank, which is interlisted - there are quite a few companies that are. Of course you risk share price changes over the few days you own those stocks. All moot if you've got USD coming in and want to keep it!

If you do want to go down the Questrade route, and find they can't deal with US banks directly, the setup you will want will likely be either Royal Bank (you can have a true US account, get paid into or transfer from your current bank; then open a Canadian chequing account and then a Canadian USD savings account. From the Canadian USD account you can pay into Questrade), or TD ("borderless" - so again you have a true US account, a true Canadian account, and a Canadian USD account - I haven't used this setup though).

[habanero]

When buying funds/ETFs/whatever, what matters a great deal is if the asset you are buying is currency-hedged or not, not really the currency it is listed in. I buy a mix of hedged and non-hedged index funds (around equally weighted). You can always debate what mix, but going 100% in one or the other is (probably) wrong. For me the main issue is that almost all my assets are in foreign-denominated currency, but as I work, live in and plan to live in a small country I am interested in preserving my local purchasing power in my local currency. As a resident of a small country a lot of stuff I need is directly or indirectly imported, meaning that FX rates play a big part in the price I have to pay. I also go and plan to go abroad from time to time on holiday, where all my expenses will be in foreign currency and so on. I haven't bothered trying to estimate my actual FX exposure as its freakin' hard but it is most certainly there and it's pretty large.

The point with currency hedging is especially valid for the bond part (if any) on the portfolio, if you live in one country and hold international bonds the value of the position is most likely dominated by FX rate movements, not bond prices, sort of voiding the very reason why you hold them in the first place.

As to if you need hedged or not depends mostly on your long-term plan. If it is to stay in Canada "forever" then you should probably make an informed decision about it, if the plan is to eventually move back to the US then it is of lesser importance.

[daverobev]

Hedging is reducing the benefit of buying over time; I've read a bit on it and honestly it seems like a waste of money for stocks. Changes through currency are either "a feature not a bug" or just automatically adjusted for by the market (see: price of bananas).

For bonds... the fixed income part should always be held in the currency you're going to want in retirement or expect to draw from if you're *in* retirement. If you're not sure then you want to hold some in each possibility to be flexible, as much as you can.

I don't think there's much suggestion anywhere to hold international bonds - certainly not in big-enough countries. Canada is small relative to the US but big enough to have a decent bond market, plus things like GICs which seem to be giving a better rate than US CDs at least.

Hedging is insurance, and you pay for it; but I'm not sure you'll likely receive the benefit. YMMV etc.

[FLBiker]

Have you confirmed with Questrade that they will take USD directly from a US institution? IIRC I had to transfer from my US bank to a Canadian bank's USD account, and then in to Questrade.

I did confirm with them that I would be able to fund my account using a pre-authorized deposit directly from my US TD account.  The person I spoke to on the phone said I could do it from the US account, but I'll confirm via email.

Re: hedging, I appreciate all the info.  I don't think I'm going to worry about it for now -- we have just a 10% bond holding, and it's primarily US.

[FLBiker]

Have you confirmed with Questrade that they will take USD directly from a US institution? IIRC I had to transfer from my US bank to a Canadian bank's USD account, and then in to Questrade.

I did confirm with them that I would be able to fund my account using a pre-authorized deposit directly from my US TD account.  The person I spoke to on the phone said I could do it from the US account, but I'll confirm via email.

Shoot -- looks like I got bad info over the phone.  You're right that I need a Canadian USD account to do the pre-authorized deposit...

[daverobev]

Have you confirmed with Questrade that they will take USD directly from a US institution? IIRC I had to transfer from my US bank to a Canadian bank's USD account, and then in to Questrade.

I did confirm with them that I would be able to fund my account using a pre-authorized deposit directly from my US TD account.  The person I spoke to on the phone said I could do it from the US account, but I'll confirm via email.

Shoot -- looks like I got bad info over the phone.  You're right that I need a Canadian USD account to do the pre-authorized deposit...

If you're with TD already, it shouldn't be too much hassle to have a Canadian side as well.

It used to be that you could (ab)use their LOC as a free chequing account - as in, free cheques, no fee, etc, and the account was able to be used fully like a chequing account. They often have good sign up deals for stuff as well, though they aren't all that good as a bank (certainly IT wise).

[FLBiker]

If you're with TD already, it shouldn't be too much hassle to have a Canadian side as well.

Yeah, I've been very underwhelmed with TD thus far (my US account was compromised mid-move and my experience with customer service was sub par).  I was hoping to transition away from them, but ultimately this is probably the easiest thing.  I don't think I'll qualify for any sign-up bonuses as I don't intend to use the account for anything other than a throughput between TD US and Questrade.  I don't really want to have to leave a minimum balance in there or set up any recurring transactions or anything.

Thanks for all the help!

[Goldielocks]

Watch out, TD Canada is horrible for account setup and withdrawal forms.  Lots of mistakes and delays.   Only a basic RRSP account opening went smoothly for me.

But, the service for the on-line investment account is top notch.  Of course, you pay $9.99 per trade for that service, but still, it is much better than several other banks / firms that I have worked with in the past.

If only they did not create nightmares for me with every form that is needed to be filled out and sent in (rarely, but a hassle each time).

If you are thinking about moving to another firm, this is the time to do it.

[daverobev]

Yeah if you're going to move... you really can't beat RBC for convenience.

1. They're biggest

2. They have a US presence and Canadian USD account

3. You can escape account fees if you jump through a couple of hoops, or at least you used to be able to

4. They are everywhere (mind you, so are TD)

[FLBiker]

Hmm, I'll definitely keep RBC in mind.  I've got the TD Canada account open already, and verified my ID at the branch.  I'm going to use it for now (to get my money from TD US to Questrade).  Honestly, I'm really just going to use it for one transfer a year or so, so hopefully it won't be too annoying.  Thanks!